The Uberization of Wealth Management

Robo advisors and beyond: why you need to pay attention to Charles Schwab, BMO and Vanguard

Mike Gardner | Feb 23, 2016

Some have called robo advisors the Uber of wealth management. Uber transformed an existing service to meet the needs of a convenience-hungry generation. Similarly, the introduction of robo advisors into the wealth management industry has disrupted the way business is done by offering a convenient, online and cost-effective way to invest for a digital-savvy generation.

In the wake of the 2008 economic crisis, robo advisors (or automated investment services) were born. Early robos, such as Betterment and kaChing (which later became Wealthfront), were simple. They were designed to rebalance investor assets within target-date funds while giving their users a modern, sleek and online interface at a lower cost. But then they became so much more. On top of adding services like tax-loss harvesting and automatic rebalancing, robos began to diversify. The catalog of automated investment services available today is far more dynamic and intricate than it was at its genesis. While the fate of robo advisors is yet to be known, what is certain is that their capabilities are expanding and investors continue to turn to them for their financial planning needs.

The Millennial Factor

The biggest achievement robos have on their mantel is the business of millennial investors. Millennial investors have, not surprisingly, flocked to robo advisors’ convenience, sleek online design, simplicity and affordability. According to a study from Wells Fargo, only 16 percent of millennials work with a financial advisor. Just as baby boomers are making their way into retirement, many millennials are now in the financial position to invest, and it’s time for wealth management firms to jump on the opportunity.

Sadly, most firms are not innovating their platforms to keep up with the paperless, convenient and cost-effective services of automated investment.

However, there are a few big firms who have innovated to keep up with robos, and more importantly, attempt to deliver a memorable client experience.

Schwab, Vanguard and BMO: Innovating for better or for worse

At the end of October 2014, Charles Schwab announced that it would be offering an automated investment advisory service called Schwab Intelligent Portfolios. By the first quarter of 2015, Schwab introduced their intelligent portfolios and officially joined the realm of robo advisors. The Schwab Intelligent Portfolio website is interactive, modern and appealing to the millennial eye. Similar to other robos, Schwab’s Intelligent Portfolios advertises, “No advisory fees. No account service fees. No commissions. Period.” as well as tax-loss harvesting and automatic rebalancing.

Now here is the real reason you need to pay attention to Charles Schwab: Within six months of entering the robo game, they were already ahead of the robo front-runners, Wealthfront and Betterment. Schwab’s competitors will be close on their heels before long.

In May 2015, Vanguard released a robo-human hybrid money management service. With this service, investors meet with an advisor to map out a future financial plan, then put that plan into action using automated algorithm-based advising. The selling point with this initiative is clearly the personal touch Vanguard brings to the table. Yet, the website pales in comparison to Schwab’s sleek and user-friendly design. And you certainly won’t find it by googling “robo advisor.”

The Bank of Montreal has been the first of Canada’s big five banks to launch a robo advisor service. BMO’s SmartFolio has only just become available to the public, but provides an easy-to-use and well-designed website allowing investors to start a portfolio with a minimum of $5,000 and an annual fee of $60. While BMO pioneers into this territory, the rest of the big five are watching from the stands. David Scandiffio, CEO at CIBC Asset Management, admits it’s not so much if they’re going to introduce automated investment services but when. “There is no doubt in my mind that the use of robo advice tools will work their way into each of the different client channels.”

Most will argue that robo advisors may be useful for simple and straightforward portfolios, but many portfolios (especially high net-worth individuals) need a personal touch to deal with complexities. While it’s true that established wealth management firms will likely not be ousted by the introduction of robos, that does not give firms the license to sit back and not innovate. At first, most doubted the real impact robos would have on the industry. Yet, the mere fact that Schwab has implemented a robo advisor platform confirms the impact robos have made. Naureen Hassan, who oversaw Schwab Intelligent Portfolios, was recently won over by Morgan Stanley to be their Chief Digital Officer for Wealth Management, suggesting Morgan Stanley will be the next in line to implement a digital experience.

The disruption caused by robos continues to reveal itself in some of wealth management’s biggest firms and most likely won’t stop soon.

Convenience Is King

The common denominator between Betterment, Wealthfront, Schwab Intelligent Portfolios and BMO’s SmartFolio is convenience. They have slogans like “a new way to invest online that’s as effortless as ordering in” and “if you have time for a cup of coffee you have time to start investing...”. Automated investment services are disrupting the wealth management industry not solely because they use algorithm-based investing strategies, but because they’re simple, fast and accessible to a tech-savvy demographic. They use a vocabulary that can relate to someone 30 and younger, and onboarding a customer isn’t all that different than signing up for Facebook.

Why This Matters

Trust and brand equity are the foundations for building a client base in this industry. Wealth tech startups spotted an opportunity to capitalize not on trust, but on the client experience. If robo advisors are able to deliver on their promises, it will only be a matter of time before they build enough consumer trust and brand equity to be considered equals with the big firms. But the big firms who are getting the early mover advantage by playing the robo advisor game with the brand equity of trusted names like Schwab, Vanguard and BMO are the ones who are going to win in the end.

For wealth management, keeping up with the trend is not so much about introducing algorithm-based automated investing. It’s about creating a sleek and interactive online user experience. It’s about creating a paperless customer onboarding. It’s about making investing cost-effective for young investors. Just as Uber is keeping taxi companies on their toes by reinventing convenience, robo advisors are challenging big firms by pushing the envelope of convenient investing.

Mike Gardner is the CEO of Agreement Express, a client onboarding automation platform for wealth management.